Lembo says Wall Street, other factors, could strain budget

Though the new state budget is just two months old, Connecticut’s chief fiscal watchdog already is warning about several problems that could push state finances into the red.

Comptroller Kevin P. Lembo warned that not only unstable financial markets, but also aggressive savings targets and revenue from new keno gaming all increase the budgetary uncertainty.

Lembo officially certified Tuesday that this fiscal year’s general fund – which covers the bulk of operating costs in the $19.8 billion overall budget – is on pace to finish $800,000 in the black.

This is the fiscal cushion built into the budget by Gov. Dannel P. Malloy and the legislature, and an official projection that matches the budget’s bottom line is common during the first two months of the fiscal year, which began on July 1.

But there already are signs that keeping the budget in balance will be a challenge, according to the comptroller, starting with the recent market correction on Wall Street.

“The current volatility in the financial markets has also complicated the budget outlook for Fiscal Year 2016,” the comptroller said. “Over the past several years, the state has experienced significant fluctuations in capital gains-related receipts.”

State government’s single-largest source of revenue, the personal income tax, is expected to raise $9.7 billion this fiscal year. About 40 percent of those receipts come from returns filed quarterly – much of which involves capital gains, dividends and other investment-related income.

Unlike income tax receipts from paycheck withholding, investment-related payments traditionally fluctuate greatly from year to year, with the annual percentage change often stretching into double digits. The Dow Jones Industrial Average, the leading indicator of the health of blue-chip stocks, suffered its first 10 percent correction since 2010 in August.

“Its important to remember that the stock market is not the economy,” Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Tuesday. “Unemployment is down, and Connecticut’s economy continues to strengthen. Nevertheless, we do partly depend on taxes based on capital gains to support state government in Connecticut. We will monitor our revenues closely and take action to keep the budget in balance as needed.”

Lembo noted that in late 2012, investors took significant capital gains to take advantage of an expiring 15 percent rate within the federal income tax. But while Connecticut experienced a one-time surge in state income tax receipts because of that in 2013, it was more than offset by a sharp drop one year later as investor confidence remained somewhat shaken.

And the comptroller added that Connecticut didn’t meet its goal last fiscal year for investment-related income tax receipts.

“It remains to be seen if the increase in gains related to sales will help to mitigate the negative impact of the present market decline,” Lembo said.

The situation on Wall Street isn’t the comptroller’s only concern with this year’s budget.

Every budget includes built-in savings targets that agencies must achieve throughout the year. But this budget relies on almost $190 million in agency savings – about $30 million more than last year’s budget.

Lembo also cited a new revenue component in the budget – the launch of keno at many Connecticut bars and restaurants. This game, which is expected to begin around January, is expected to raise $13.6 million.

These and other revenue assumptions need to be monitored closely, he said, adding that “undoubtedly, revenues will be adjusted in future months as trends become better defined.”

The top Republican in the Senate and one of the most vocal critics of Democratic budget policies, Minority Leader Len Fasano of North Haven, had bumped heads with Lembo — also a Democrat — last February, arguing the comptroller should have spoken out more vigorously against a growing deficit in the 2014-15 fiscal year.

Lembo is expected to close the books later this month on the 2014-15 fiscal year, a budget that is on pace to feature the first deficit of Malloy’s administration, albeit a small one. The last projection from both the governor’s budget staff and from Lembo placed that likely shortfall at $70.9 million, or just under one-half of 1 percent of the general fund.

Fasano, who said he’s convinced the current budget also will fall into deficit before the fiscal year ends, challenged Lembo on Wednesday to a friendly wager. “The state will once again end in deficit,” Fasano wrote to the comptroller. “I am so sure of this, in fact, that I am willing to bet on it, and whoever is right owes the other a dinner.

“I am typically not one to enter into a bet lightly and this will be the first bet I hope I don’t win. However, in this case, when you look at the numbers, it will be (a) tough one to lose.”

The comptroller replied that, “I’m not one for wagers – not with my money and certainly not with the taxpayers. … Let’s just agree to meet up anyway and split the bill after a meaningful policy discussion (rather than gimmicky letters). I’m guessing that we will agree on more things than we disagree – like the need to bolster wages for Connecticut workers, the need to close the digital divide in Connecticut and reinvent our technological infrastructure so that all businesses and households can work in today’s technology-driven world. I look forward to hearing about all of your big ideas as well, so let’s put something on the calendar. But remember…I’m a vegetarian, so save the bull for someone else.”

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Keith, with Jacqueline Rabe Thomas, won first prize in investigative reporting from the Education Writers Association in 2012 for a series of stories on the Board of Regents for Higher Education. The former State Capitol bureau chief for The Journal Inquirer of Manchester, Keith has spent most of 24 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut's transportation and social services networks. A former contributing writer to The New York Times, Keith is a graduate of and a former journalism instructor at the University of Connecticut. E-mail him at kphaneuf@ctmirror.org.

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